I need help evaluating this property. I seems like it's a pretty good deal but I'd like some experts opinions and help completing this deal if it makes sense. The owner is going into foreclosure so owner financing is out of the question. I think the biggest problem would be coming up with the 20% needed to make these numbers work.
Purchase Price:$2,350,000
Property type: 72 unit Apartment
Year Built: 1970
Rentable Area: 58,211 sq ft
Lot Size:: 124,823 sq ft
Current Occupancy: 89.19%
Purchase Price: $2,350,000
Assignment Fee1: $100,000
Cap Rate2: 10.77%
Net Operating Income3: $253,078.29
Pre-tax Cash-flow4: $102,986.01
Earnest Money Deposit5: $21,500
Down Payment: $470,000
Loan Amount: $1,880,000
Amortization Period: 30 years
Interest Rate: 7%
Mortgage: $12,507.69
Loan To Value Ratio: 80%
Debt Coverage Ratio: 1.5044
Unit Mix: 24 1/1.5, 47 2/2, and 1 3/2
Scenario A:
You'll purchase the property at a 10.77% cap rate (based upon his actual numbers), DCR of 1.6862 (assuming you get financing at 80% LTV with 7% APR); and you should receive an annual pre-tax cash-flow of at least $102,986.
Scenario B:
You could increase your cap rate to 12.1%, your DCR to 1.8949, and the yield of your annual pre-tax cash-flow by nearly $32K simply by reducing your vacancies and collections (from nearly 11%) to 5% of the gross rents (which is the norm for that areaâ€"so it's doable). Making those changes will transform a good deal into a better one.
Scenario C:
The tenants began to pay their own utilities in December 2008, because the seller installed individual meters (Rent Utility Bill Back System [RUBBS]), and the seller reduced their rents (by roughly $100 per unit). Those modifications reduced the
gross rents and the net operating expenses (most—but not all—of the utilities), and increased the net operating income. Yet, some tenants opted to pay higher rents and
have the owner pay their utilities in March 20097. Next, I projected the March 2009 numbers for the income and expenses over a total of 12 months, and I combined
those changes with the reduction in the vacancies and collections from Scenario B. Although these numbers are technically proforma numbers, they're based on the
scheduled rents and expenses. Thus, you could increase your cap rate to 13%, your DCR to 2.0356, and double the yield of your annual pre-tax cash-flow; doing this will transform a good deal into a great one.
Scenario D:
You could increase your cap rate to 13.63%, your DCR to 2.1337, and the yield of your annual pre-tax cash-flow by nearly $15K simply by starting with the changes in Scenario C and increasing the rents (raising them to market value [roughly a 3%
increase]).
